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Executives

Thomas S. Wu - Chairman, President and CEO

Douglas Mitchell - Sr. VP, Corporate Development and IR

John M. Kerr - Sr. VP and Chief Credit Officer

Craig S. On - Sr. VP and Corporate Controller

Douglas M. Sherk - CEO, EVC Group

Analysts

Andrea Jao - Lehman Brothers

Brett Rabatin - FTN Financial Securities Corp.

James Abbott - Friedman, Billings, Ramsey

Erika Penala - Merrill Lynch

Frederick Cannon - Keefe, Bruyette and Woods

Lana Chan - BMO Capital Markets

Aaron Deer - Sandler O'Neill

Joe Morford - RBC Capital Markets

UCBH Holdings Inc. (UCBH) Q1 FY08 Earnings Call April 25, 2008 11:00 AM ET

Operator

Good morning, ladies and gentlemen, and thank you for standing by and welcome to the UCBH Holdings Incorporated first quarter 2008 earnings conference call. During today's presentation, all parties will be in a listen-only mode, and following the formal presentation, the conference will be opened for questions. [Operator Instructions]. As a reminder, this conference is being recorded today Friday April 25th, 2008.

At this time, I would now like to turn the conference over to Mr. Doug Sherk. Sir, you may now begin the call.

Douglas M. Sherk - Chief Executive Officer, EVC Group

Thank you, Operator. Good morning, everyone. Thank you for joining us today for the UCBH first quarter 2008 conference call and webcast. Before [technical difficulty] the first quarter 2008 results was distributed yesterday after the market closed. You know, for some reason you haven't seen a copy of the release and would like one, please feel free to call our office at 415-896-6820 and we'll get you a copy immediately. There will be a seven-day replay of this call beginning approximately one hour after we finish this morning. The replay number is number 800-405-2236 or for international participants, 303-590-3000. Both numbers require the passcode of 11110281 followed by the # sign. Additionally, this call is being broadcast over the Internet and is accompanied by a slide presentation that illustrates many of management's important points. Both the call and the slide presentation can be accessed by the company's website at www.ucbh.com.

I'd like to remind you that this conference call contains forward-looking statements regarding future events or the future financial performance of the company, as forward-looking statements involve risks and uncertainties and other factors that may cause the actual results performance or achievements of the company to be materially different from future results performance or achievement expressed or implied by such forward-looking statements. Such factors include, among other things, general economic and business conditions in the areas in which the company operates, demographic changes, competition, fluctuation in market interest rates, changes in business strategies, changes in credit quality and other risks detailed in the documents the company files from time-to-time with the SEC.

We wish to caution you such statements are just predictions and actual results may differ materially. We refer you specifically to the company's latest Form 10-K and 10-Qs which have been filed with the SEC. Finally, we would request that during the question-and-answer period, each questioner limit themselves to two questions and then we would encourage the questioner to re-queue.

I would like to turn the call over to Mr. Tommy Wu, Chairman, President and Chief Executive Officer of UCBH.

Thomas S. Wu - Chairman, President and Chief Executive Officer

Thank you and good morning to everyone. We appreciate you joining us this morning for our review of our first quarter 2008 results. On the call with me today is Jon Downing, our Chief Financial Officer; Craig On, our Deputy Chief Financial Officer; John Kerr, our Chief Credit Officer; and Doug Mitchell from Corporate Development and Investor Relations.

Jon Downing was under the weather this morning and he lost his voice. I would like to ask Doug Mitchell to do the formal presentation on behalf of Jon and Jon will answer questions later in the Q&A session. We would first like to discuss the financial performance of this past quarter and then provide detailed review of our loan portfolio, during which we would explain to you the conclusions of our comprehensive review of the construction loan portfolio in addition to observations of credit quality of our loan portfolio in total.

We encourage you to follow the relative presentation with the slides provided on our webcast, which is available on www.ucbh.com. Finally, we will review our strategy as we move forward through 2008 and the conclusion of our formal remarks and presentation we'll take your questions.

I would now ask Doug Mitchell to discuss our financial position and results of operations. Followed Doug comments and John Kerr's detailed explanation of the credit portfolio I would discuss our outlook for 2008 and our long-term business strategies. Doug?

Douglas Mitchell - Senior Vice President, Corporate Development and Investor Relations

Thank you, Tommy, and good morning, everyone. I would like to provide an overview of our financial results for the first quarter of 2008. The first quarter of 2008 was characterized by a strong increase in interest income over the corresponding quarter of the prior year, fewer security and fewer loan sales, strong fee income and solid quarter earnings.

Interest income increased 11% year-over-year, but we experienced a 2% decline relative to the fourth quarter 2007 due to the aggressive Fed funds rate cuts experienced during the first quarter of 2008. Commercial banking fees were stable in the first quarter of the year compared with the first quarter of 2007. Service charges on deposit accounts increased by 31% to $2 million in the first quarter of 2008 from $1.5 million in the first quarter of 2007. Total non-interest income for the first quarter of the year increased by 241% to $3.6 million from a negative $2.5 million in the fourth quarter of 2007. First quarter 2008 non-interest income decreased 71% compared with the fourth quarter of 2007 reflecting the decrease in gain on sale of loans, the write-down on CDOs and the LOCOM adjustments that occurred in the first quarter of 2008.

Given our current experience with the diminished liquidity and softer pricing in the secondary market for bank loans, we elected to not be aggressive in selling CRE loans during the first quarter of 2008. Therefore, we had $742,000 of gains in the sale of CRE and multifamily loans for the quarter. Small business loan sales were low as well due to pricing below our expectations and we expect to keep the SBA loans versus selling them at a lower premium. We anticipate that these market conditions will prevail through 2008 and that the level of loan sales will remain depressed until market conditions improve.

We realized the $3.8 million loss in the first quarter 2008 reflecting further rate downs of the two REIT CDOs we hold in our investment portfolio. This is in addition to the fourth quarter 2007 CDO write-down of $11.6 million. The book value of these CDOs is now at $4.6 million or 23% of the original face value. Finally, certain CRE loans held for sale were impacted by a lower of cost or market or LOCOM adjustment creating a $1.4 million loss during the quarter. Such loans were transferred to the loan portfolio to preclude the potential of additional LOCOM adjustments on these loans in future periods.

Net interest income for the quarter decreased 3% to $83.1 million from $86.1 million in the fourth quarter of 2007, but increased 13% from $73.8 million from the first quarter of 2007. The decrease in the linked quarter reflects the Fed funds cuts and an additional $3 million or 18 basis points, which was attributable to the reversal of interest on non-performing construction loans as a result of downgrades by management. In the first quarter of 2008, we increased our provision for loan losses to $35.1 million. This is a 150% increase over the provision of $14 million in the fourth quarter of 2007 and up from a provision of $1.1 million in the first quarter of 2007.

The first quarter of 2008 provision included $33.1 million for construction loans primarily in distressed markets which include Riverside County, San Bernardino County, the Greater Sacramento area, Imperial County, the High Desert and the Central Valley, all of which are in California and Nevada.

Non-interest expense increased 2% sequentially for the quarter to $48.6 million from $47.5 million in the fourth quarter of 2007 and increased by $4.7 million from $43.9 million in the first quarter of 2007. The growth in expenses primarily reflects the impact of increased personnel expenses associated with the acquisition of Chinese American Bank in May 2007 and the Business Development Bank in China in December 2007.

Taxes for the quarter were lower due to the lower level of income resulting from the larger provision, the write-down on CDOs and the LOCOM adjustment that occurred in the first quarter of 2008.

Net income for the quarter taking into account the larger loan loss provision and the write-down discussed previously, was $2.2 million, a decrease of 92% and 86% respectively from the income of $27 million for the first quarter of 2007 and $16.2 million in the fourth quarter of 2007.

The diluted earnings per common share were $0.02 per share for the first quarter of 2008 compared with $0.26 per share for the same period in 2007 and compared with $0.15 per share for the fourth quarter of 2007. In the absence of the large increase in our provisions for loan losses, due to the rapid deterioration in the construction lending markets, the write-down on CDOs and LOCOM adjustments that we have recognized over the past two quarters, diluted earnings per share would have been approximately $0.27 for the first quarter of 2008 and $0.25 for the fourth quarter of 2007. We are highlighting these figures as we feel that these adjusted EPS figures more accurately reflect the Bank's core operational results and demonstrate our ongoing earnings power.

The net interest margin for the quarter was 3.04%, a decrease of 22 basis points from 3.26% for the corresponding quarter in 2007 and a decrease of 35 basis points from 3.39% for the fourth quarter of 2007. This decrease is attributable to the Fed funds cut of 50 basis points and 75 basis points respectively for January and March of 2008. As well is due to the reversal of the accrued interest on loans which were classified as non-performing during the quarter. We anticipate that the net interest margin will expand marginally during the year. The average loan yield for the quarter was 6.94%, down from 7.7% for the same period in 2007 and from 7.75% in the fourth quarter of 2007.

Our average cost of deposits was 3.28% for the first quarter of 2008, a 44 basis point decrease from 3.72% for the same period in 2007 and a 37 basis point decrease from 3.65% in the fourth quarter of 2007. These decreases reflect management's continued focus on reducing deposit costs in tandem with the Fed funds cuts during the recent quarter.

Our capital ratios continue to demonstrate stability. Our Tier 1 capital ratio was 9.17% for the quarter and has been enhanced by the capital infusion of $95.7 million from China Mingsheng Banking Corporation in March 2008. We'll be discussing our strategic partnership with Mingsheng later on in this call as well. Both the company and the Bank continue to be well capitalized. Total loans growing at a 20% compounded annual growth rate since 2004, grew at an annualized rate of 16% in the first quarter of 2008 from $8 billion to $8.4 billion. Our commercial business and commercial real estate loans increased to $2.2 billion and $2.6 billion respectively in the first quarter of 2008, up from $2.1 billion and $2.5 billion respectively at December 31st, 2007.

Our multifamily loans were flat for the quarter and construction loans were up $104 million from $1.7 billion in the fourth quarter 2007 to $1.8 billion in the first quarter of 2008 largely reflecting draws on existing commitments. Total deposits growing at a 14% compound annual growth rate since 2004 reached $8.1 billion at March 31st, 2008, an increase of 4% from $7.8 billion in the previous quarter.

Non-interest bearing accounts were $900 million at March 31st, 2008. Interest bearing accounts grew to $2.6 billion and time deposits grew to $4.7 billion during the quarter. The competition for deposits remains high and the Bank continues to focus on developing its core deposits in order to improve its overall cost of funds.

At this point, I would like to turn the discussion over to John Kerr, who will provide an overview of the total loan portfolio and a deeper analysis of the constructions portfolio, which was the drive to larger provisions and charge-off expense in the quarter. John will also provide an overview of the CRE in commercial loan portfolios. John?

John M. Kerr - Senior Vice President, Chief Credit Officer

Thank you, Doug, and good morning, everyone. Starting in 2005, we began to diversify our loan portfolio both geographical and with regard to loan mix. We plan the systematic reduction of our multi-family and commercial real-estate loans and an increase in our commercial business loans. Our loans have grown substantially during this time, from 4.4 billion at year end '04 to 8.4 billion at March 31, 2008. The effect of this strategy is demonstrated in the current concentration of our loan portfolio. At year end 2004, multi-family and commercial real-estate loans comprised 27% and 44%, respectively of our portfolio. And at the end of quarter 1, 2008 these concentration levels have been reduced to 14% and 31%, respectively. The decrease reflects internal securitizations, loan sales and increased originations of commercial business loans. We are pleased with the growth of our commercial business portfolio, which grew from 11% of our portfolio at year end 2004 to 27% at the end of the first quarter of 2008.

Construction loans comprise 21% of our portfolio at the end of the quarter. Finally, the consumer portfolio remains the small component of total loans decreasing from 11% at year end 2004 to 7% at the end of the first quarter of 2008. We reiterate that UCB has never had and does not currently have any subprime mortgage loans in its consumer portfolio. Additionally, less than 1% of the total loan portfolio exposure is to HELOCs, which is a component of the consumer portfolio.

As you can see from the two charts, UCB has been successful in diversifying our loan mix in our portfolio in the last three years. Our strategy is to continue to focus on the building of our commercial business portfolio in the future. And keeping with our strategy to diversify geographically both domestically and internationally, our loan portfolio is now more representative of the areas in which we do business.

Back in 2004, the bank began our domestic and international expansion plans, through both organic growth in New York and Hong Kong; and in 2005, through a merger and acquisition strategy resulted in acquisition of banking operations in Washington … Washington State, Texas, Atlanta, Boston and Mainland China, as well as expanding operations in New York.

In tandem, we reduced our loan concentration in California from 96% in 2004 to 66% of the portfolio at the end of the first quarter 2008. Over the same period, we added UCB China to our existing Hong Kong portfolio to reflect the overall portfolio in the Greater China region, which is expanded from 3% to 11% of total loans.

New York is also expanded notably to 9% of total loans. We expect to see these trends continue as the bank becomes less dependent on California as a source for business growth and our dramatic growth in the China region continues to be a driving force in the commercial business portfolio. This truly reflects the success we have made in the geographical diversification of our business, and we believe that this significantly mitigates concentration risk of our loan portfolio.

As the financial industry is going through an unprecedented credit cycle, our credit quality continues to be stronger than that observed in the industry in general. However, during the first quarter 2008 certain distressed markets in California have experienced a significant drop in value in construction lending. This has caused us to significantly increase our allowance for loan losses in the quarter. I will discuss what we have done to identify, isolate and manage this exposure in detail in a moment. I would like to highlight some total portfolio of credit metrics first.

Our strict adherence to very prudent criteria and the underwriting of our loans has not changed, although the types of projects in which we will participate has. We have taken action to address and manage any distressed areas in our portfolio and it is this decisive action that resulted in the increase in the first quarter 2008 charge-offs which totaled 12.3 million, including 8.6 million in construction loans located in distressed markets. And resulted in a provision for loan losses was 35.1 million.

We increased our allowance for loan losses to $102.8 million in the first quarter of 2008 a 27% increase from the $80.6 million we had allocated in last quarter of 2007. This is also an increase of 63.7% from the $62.8 million allocated in the first quarter of 2007. The allowance for loan loss to total loans held in portfolio ratio is now at 1.25% versus 1.03% in the fourth quarter of 2007. The total reserves which is inclusive of the allowance and reserves for unfunded commitments to total loans including cash secured loans is now at 1.37% versus 1.13% in the fourth quarter of 2007.

Our construction loan portfolio has been particularly hard hit by recent economic events, and the problems in this portfolio have been responsible for the overall increase in loan delinquencies we have experienced.

One additional note, CRE delinquencies declined relative to fourth quarter 2007. And while commercial delinquencies grow slightly, they remained quite low when compared to bank experience over the last three years. And management continues to be pleased with the performance of these portfolios.

In the first quarter of 2008 total portfolio delinquencies were $118.4 million or 1.44% compared with $69.3 million or 0.89% in the fourth quarter of 2007.

Construction loans comprised $50 million in the first quarter which reflected a 2.81% total delinquency rate for construction loans. As the bank completed its review of the construction loan portfolio received updated appraisals, and identified projects and repaired, we downgraded a number of construction loans and discontinued funding construction loan interest reserves on these projects. Majority of these loans are reflected in our NPA figures.

Total gross charge-offs for the first quarter were 12.3 million up 9.8 million from the fourth quarter of 2007, and primarily driven by $8.6 million in construction loans in distressed markets. The charge-offs in the commercial business portfolio were consistent with our normal commercial lending activities. Total NPAs excluding other real-estate owned and performed restructured loans were 181.3 million in the first quarter of 2008 as compared with 53.1 million in the fourth quarter of 2007.

Construction NPAs were $139 million in the first quarter of 2008 up from $12.8 million in the fourth quarter of 2007, the majority of which are due to downgrades that occurred during the quarter. Having evaluated the risk inherent with these loans, we are confident that credit risks are manageable.

I will now move into a detailed discussion of the construction portfolio. Starting 2006, we have been selective in the types of construction projects in which we would participate and recognition of the higher risk portfolio of these projects represented. Changes in criteria included the approval of land loans only on an exception basis, the discontinuing of loans on townhouses and condos outside of coastal areas. And the cessation of participation and single family phase development projects.

As a result our construction portfolio became better diversified and currently only has 5% of our land. As we track the problems plaguing the subprime mortgage market, which did not directly impact, usually be, since this was not a market in which we participated. We also monitored the overall portfolio for indicators of stress.

During the fourth quarter of 2007, we took action as the continuing deterioration in the subprime mortgage markets began to affect construction lending in certain markets. We initiated a review of 100% of our residential construction loans in California and Nevada. We started odd renew appraisals on all loans, we identified as problems or potential problems and took appropriate provision to new appraisals and current information started coming in, in the latter part of the quarter.

As a result, we downgraded number of construction loans we believe it could become problematic. In the latter part of first quarter of 2008, we received the new appraisals that now reflect significant weaknesses in loans in the certain distressed markets. The situation in the mortgage market has worsened as negative indicators picked up speed and the velocity of downward movement in real-estate values increased impacting the absorption and ultimate value of new construction.

Our executive level management became actively involved and we expanded our special assets group to actively manage loan workouts. We also increased our provisions to reserve funds against potential charge-offs.

It's important to note that 82% of our construction portfolio resides in non-distressed areas, the remaining 18% of the total construction portfolio is located in what we have defined as distressed areas, which includes Riverside with 6% of the distressed loans, the Central Valley with 4% of the distressed loans, San Bernardino with 3%, Sacramento with 2% and Imperial County the high desert in Reno, Nevada with 1% each. With the geographic diversification we believe the credit risks are manageable.

In response to market conditions in California, we have continued to diversify construction lending across our banking footprint. Of total construction commitments of 139 million in the first quarter of 2008, you can see how diversified we are in our business from the bar chart on this page. New York is still a stable market and the projects we finance are very solid. To conclude, we believe we have a well diversified construction loan portfolio.

I will now move into a detailed discussion of the commercial real estate portfolio. On our CRE portfolio, we are also much diversified in terms of property types. Both retail stores and offices comprise 18% each of our commercial real estate loans, shopping centers 12%, industrial properties and warehouses 11%, investment properties 9%, single purpose and hospitality properties 5% each. Next years property is 3%, loss development and community 1% each and other 16. Any of the industrial warehouse properties and retail stores are owner occupied. I should add that the 16% of other there is a large list of various types of things like medical buildings, garages, restaurants et cetera.

The only 40% of our commercial real estate portfolio is now outside California, and the overlap with the distressed residential real estate markets is very limited. Most of our CRE loans are still located in California approximately 61% our ongoing focus outside the state and diversified our risk as well.

Currently, 10% of our loans were originated in New York, 25% in the other states, Washington, Georgia, Massachusetts and Texas and 4% in Greater China. This is a very important page as you can tell how much effort we have put in the past three years to diversify our geographical concentration. Despite the current upheaval in the mortgage markets our commercial real-estate portfolio which had strong underwriting remains healthy. In accordance with our stringent criteria, the average loan size of our commercial loans is 1.7 million with average original debt service coverage of 1.555 times and average original loan-to-value is only 60%. We believe that our CRE portfolio will continue to perform well in today's environment.

As previously mentioned, we have been diversifying the total loan portfolio away from CRE lending. And to further mitigate the risk in the CRE portfolio, we have also diversified geographically across United States and in Asia. Of 250 million in total commitments generated in the first quarter 70 million of the new loan provision came from New York and the northeast 61 million from Southern California, 38 million from the Northwest, 35 million from Northern California, and 41 million from Greater China demonstrating a diversity of markets from which we source loans. The New York and the Seattle markets continue to be stable. And we feel very comfortable with our business in these markets.

I will now move into a detailed discussion of the commercial business lending portfolio. Our commercial business loans and trade finance portfolio is extremely well diversified from the industry concentration standpoint. The top-ten industries in our portfolio also include our commercial lending activities in the Greater China region. The largest concentration is in the food and grocery industry with approximately 320 million. This particular industry being defensive relative to economic cycles is expected to hold up well in the current economic environment.

Additionally, there are exposures to the building suppliers and the home furnishing industries. This represents areas to which our attention is already turned and we will now closely monitor these segments for any credit deterioration. As previously mentioned, we are pleased with the current performance of the commercial portfolio.

We are doing extremely well in terms of geographic diversification of our commercial lending portfolio most notably the Greater China portion of the portfolio now represents 35% of our total C&I lending portfolio.

Southern California continues to be a large market at 28% in Northern California the Bay Area as the next largest with 16%. We anticipate that future growth of our C&I portfolio will be from the Greater China region as a result of our unique Greater China capabilities. The Southern California trade finance portfolio will also continue to grow due to the trade flows going through the Long Beach port of Southern California from Greater China.

A 481 million in total commercial business commitments in first quarter, the majority of which represent the growth in trade business between California and China, 184 million or 38% of new commitments originated in Hong Kong and Mainland, China. Northern California follows with 147 million in new commitments, then Southern California with 126 million in new commitments. We are pleased with these results, and you can tell our Greater China strategy is working very nicely for our commercial lending and trade finance business.

At this point, I'd like to address the investment portfolio. In the first quarter 2008, we implemented a leverage strategy to mitigate the interest rate risk and our balance sheet in anticipation of the aggressive Fed funds rate cuts. We were able to decrease the banks asset sensitivity by acquiring 470 million of Ginnie Mae securities, which are generating approximately 300 basis points or 1 million per month in net interest income.

When we purchased the securities, we anticipated that the Fed funds rate would be cut thus lowering our funding cost accordingly. Before year end 2008, these securities will be removed from the balance sheet, and we anticipate that we will realize a gain on the sale of these securities.

As previously noted, our REIT TPS CDOs are now written down 77%. Given the volatility in the securities markets, we continue to monitor credit driven bond pricing. The two CDOs credit ratings remain unchanged and they are still performing, we do not have plans to dispose these bonds. It's important to note that the CMBS securitization residual tranche, which is part of the AAA rate internal CRE securitization. And our AAA rated subprime bond market values continue to hold during the first quarter.

Overall, 92% of our bond portfolio as of the end of first quarter of 2008 is AAA rated. 4% is AA rated, 3% is A rated, and 1% is not rated. At this point I would like to turn the call back over to Tommy, to discuss our outlook for 2008 and our strategies going forward. Tommy?

Thomas S. Wu - Chairman, President and Chief Executive Officer

Thank you, John. Now, I would like to discuss how the developments in the first quarter of 2008 have impact our outlook for 2008 by walking through our revision to full year 2008 EPS guidance.

Based on our complete review of the problems in the construction lending portfolio in California and Nevada; and our ongoing aggressive monitoring of the remainder of the overall loan portfolio, we are providing revised guidance for 2008. The revised guidance is based on some key assumptions and it's important to recognize that the guidance could be impacted by deepening of the current economic downturn. The assumptions include a further Fed funds cut of 50 basis point in the second quarter of 2008.

Loan growth in the range of 5% and deposit growth of 12% for the year. The net interest margin is between 3.04% and 3.06% by year end. A total loan provisioned of between 60 to 70 million for the full year 2008. No further impairments to our securities portfolio. No additional selling or securitizing loans for the remainder of 2008, as we wait for market liquidity and pricing to normalize.

But step two of China Mingsheng Bank strategic partnership will close before the year end. In view of our performance in the first quarter, we are now revising our full year diluted earnings per share guidance from $0.60 to $0.65 per share for the year, a revision from $1.15 to a $1.18 per share guidance we provided at the end of 2007. This revision reflects an increase in the provision for loan losses of $0.28 to $0.29 per share, the specs of the unexpected rate changes from the first quarter of 2008, debt lowered for EPS by an additional $0.18 to $0.19 per share. The declines in the market value of CDOs and low comp adjustments thereby reduced earnings by $0.05 and a reduction in gains on sales of loans of $0.03 per share. We project the year-end Tier 1 risk-based capital ratio to be at 10%, total risk-based capital ratio at 12%, and Tier 1 leveraged ratio at 8.75%. Despite the disappointment in our results for the first quarter, our franchise remains strong and continues to grow. We are fortunate to be able to differentiate ourselves from our peer banks in several ways.

We have a strong management team with proven experience in gathering… challenging credit cycles as far as, the business model that is unique in U.S. Banking. We anticipate that our strengths will accelerate our recovery and momentum going forward. We have a domestic footprint in six states including California, New York, Massachusetts, Washington, Georgia and Texas. These are areas with highly concentrated Chinese and Asian communities, many of them underserved by other banking institutions. Our branches and offices are located in all the metropolitan cities, facilitating the growth of our trade finance platform on both sides of the Pacific Rim. Our trade financial income continues to grow and provide substantial portion of our non-interest income. Our expansion in Greater China has been extraordinary. After only four years of operations, our Hong Kong has gathered 1.2 billion in deposits and has experienced record growth in trade finance business.

Trade fees in Hong Kong continue to grow very nicely. In March 2008, we received an extended license from the China Banking Regulatory Commission to conduct a full scope of RMB business with Chinese-owned companies for our subsidiary UCB China Ltd. There was a closing of this transaction in December '07. UCB China Ltd. has experienced strong loan growth during the first quarter. The majority of the growth is in the SME market and also from our existing UCB customers who are doing business on both sides of the Pacific Rim. UCB China also enhances our trade finance business as demonstrated by the robust C&I new loan originations in the first quarter of 2008. Our unique Greater China strategy and banking platform in Hong Kong and the mainland China allows us to provide full banking services to our own customers who are doing business in China as well as to pursue the significant growth opportunities in China offered by the local SME market doing business with the U.S. companies.

In order that we continue to grow our China business in a safe and sound manner, a strong risk management program has already been put in place. Most importantly, the majority of the credit approvals are going through a credit committee chaired by John Kerr our Chief Credit Officer in San Francisco here, with Tony Tsui our director of Greater China region in Hong Kong as a member. As you may know China Banking Regulatory Commission will slow down opening of the banking sector this year. It is almost impossible to duplicate to what we have created at UCB China Ltd. They extended our R&D license to conduct R&D business with local Chinese companies will further enhance our capabilities to grow our business on both sides of the Pacific Rim.

We believe that this franchise value of UCB China Ltd. has already increased substantially after the closing of the acquisition in December '07. We closed the step one of the strategic alliance transaction with China Mingsheng Banking Corp. in March 2008 by issuing 5.4 million UCB shares to Mingsheng at $17.79 per share. Step two, will be closed by the end of 2008 at a premium of 5% over market price. Mingsheng has been optioned by mutual agreement of Mingsheng and UCBH and subject to U.S. regulatory approvals to increase the ownership to 20% through 2009. The first phase gave Mingsheng a 4.9% in UCBH and provided UCBH with 95.7 million of new capital in quarter one of '08. In the second phase Mingsheng will acquire an additional 5% of UCBH bringing its ownership to 9.9% by the end of the year. The influx of capital coming from Mingsheng before year-end 2008 ensures that our capital ratio remains very strong.

We have shocked [ph] our capital ratios, applying optimistic, pessimistic, and realistic scenarios. In every scenario, we remained well capitalized. Both Mingsheng and UCB have already formed a task force to develop business partnership between the two banks. It will further enhance our capabilities to increase market shares in the future. We are pleased with the progress of the development.

As for the strategy, for the remainder of 2008, we believe that we are well positioned to manage this unprecedented credit challenges, and we'll return to normalized earnings and possibly grow pretty quickly. I will expand the special assets group as mentioned by John Kerr, were aggressively managed the workout efforts of the problem loans in our portfolio to minimize potential losses. Under the current economic conditions, we are managing loan growth in a very prudent manner. We are substantially reducing construction lending activities and continue to focus on commercial lending and trade finance business by leveraging our very unique capabilities and platforms. We will continue to properly diversify our real estate portfolio as well.

Deposit gathering continues to be a major focus of the bank. We believe this is the right time to grow our CD portfolio, while focusing on gathering core deposits. We will continue to expand existing customer relationships, leveraging on our unique national and Greater China platform to increase profitability.

Recognizing debt in an unstable and worsening economy can upset even the best business plans. We nevertheless anticipate returning to normalized earnings in the second half of 2008, with strong profitability growth in 2009.

In addition to this discussion of the first quarter results, and the detailed review of our loan portfolio, we will also be hosting an Investor Day in the New York City on May 13, 2008. The senior management team of UCBH will give a detailed presentation on UCBH and this event will also be webcast. We will announce the details and logistics of this event in the coming week.

This concludes our formal remarks this morning. Thank you again for participating in this call. I would now ask the operator to open up the lines for questions you may have. Thank you very much.

Question And Answer

Operator

Ladies and gentlemen, at this time we will begin the question-and-answer session. [Operator Instructions]. And our first question comes from the line of Andrea Jao with Lehman Brothers.

Thomas S. Wu - Chairman, President and Chief Executive Officer

Hey Andrea, good morning.

Andrea Jao - Lehman Brothers

Good morning everyone. First of all thanks for the slide. The additional disclosure certainly, at least helps me, follow along. My question is on capital. Is your tangible equity ratio at 5% as of March 31? Just want to make sure I have the right number. And where do you think this ratio should be? The broader, you know, smaller regional bank is probably closer to 7%. So, what makes you comfortable at 5, or do you want it to be higher? How do you get there?

Jonathan H. Downing - Executive Vice President and Chief Financial Officer

Good morning, Andrea.

Andrea Jao - Lehman Brothers

Good morning Jon.

Jonathan H. Downing - Executive Vice President and Chief Financial Officer

We think that 5% tangible is for quality [inaudible], well we never want to go below there. Having said that, we recognize we did go below there a little bit at 12/31/07 as a result of the Mingsheng one transaction, not closing by that date. So as we go through the 2008 year, we expect a steady increase from the 5% tangible ratio. How did we get there? The retention of earnings and the Mingsheng two transaction occurring. I think more important on this tangible ratio is that of the total risk-based ratio. The total risk-based ratio will grow to 11.58% by year end 2008 in a shock scenario, 12.29% total risk-based ratio by 12/31/08 in a normalized scenario.

Thomas S. Wu - Chairman, President and Chief Executive Officer

To conclude, we feel comfortable with the way we are building our capital and with the China Mingsheng capital coming in, in the latter part of the year. I think that will further strengthen our capital ratios at that point.

Andrea Jao - Lehman Brothers

Okay. My second question is, your new loan loss provisioning assumptions, how much of deterioration in the broader commercial real estate area is incorporated into those assumptions? And again, what gives you comfort that, I suppose, construction weakness is not spread to the broader commercial real estate?

John M. Kerr - Senior Vice President and Chief Credit Officer

First of all, there is a huge difference in the health of the residential real estate market versus the commercial real estate market. Obviously, there would be some effect of a deep recession. As part of this exercise in the last few months, I went through and looked at every large loan we have in the CRE portfolio and basically we are not seeing indications so far of deterioration in that portfolio. It's performing extremely well.

Thomas S. Wu - Chairman, President and Chief Executive Officer

In essence, I think the devised guiding on allowance… basically we are trying to be conservative, because just in case. But we believe the $40 million to $45 million additional provision for if year will be adequate and also is a conservative number.

Andrea Jao - Lehman Brothers

Okay. Thank you so much.

Thomas S. Wu - Chairman, President and Chief Executive Officer

Thank you, Andrea.

Operator

Our next question comes from the line of Brett Rabatin with FTN Investments. Please go ahead.

Thomas S. Wu - Chairman, President and Chief Executive Officer

Hi Brett. Good morning.

Brett Rabatin - FTN Financial Securities Corp.

Good morning Tommy, how are you?

Thomas S. Wu - Chairman, President and Chief Executive Officer

I am doing good. Thank you.

Brett Rabatin - FTN Financial Securities Corp.

I wanted to ask you Tommy or maybe for John Kerr, on the updated appraisals. It sounds like you've been through the construction portfolio, particularly towards the end of the quarter. Do you have updated appraisals on some portion of the portfolio that you are comfortable giving a number for, or do you have additional appraisals to get in other pieces of the portfolio? Can you give us just a flavor for your updated appraisal process with your construction portfolio?

John M. Kerr - Senior Vice President and Chief Credit Officer

Okay. First of all, we concentrated obviously on the distressed markets and on problems that we identified, and we have updated appraisals on a large proportion of the stress markets and where we have identified problems. Keep in mind that in quite a few of these cases of more of our larger projects, they are agented by another bank. And probably 60% to 70% of our reserves right now are on deals agented by people like Wachovia, Bank of the West, US Bank and so on. So we don't have strict control of ordering the appraisals on those ones.

However, we have received appraisals on most of our projects of any size and the ones that are in the distressed areas. The actual results of those appraisals varies widely by project. Each of these projects is a mini economy if you want. And although our average, let's say, on a fairly large number of FAS-114 analysis that we have done, our average reserve has been something in the order of 22%. That being said, it's quite volatile around that number. A lot of projects are doing quite well and when we look at them, we don't envision any loss. And some projects are being very well supported by the sponsors.

On the other hand, we might have zero or very small reserve on one deal and because of a large land component with the deal, we might have a larger reserve on another and then sort of average out. We looked at a fairly large number though, and we are starting to get a feel for loss potential.

Brett Rabatin - FTN Financial Securities Corp.

Okay. And just as a follow-up to that, should we assume in the second quarter that you are continuing to go through the portfolio and get appraisals on other areas of the portfolio that are not Riverside, San Bernardino, that sort of thing and also look at the other areas that's distressed?

Thomas S. Wu - Chairman, President and Chief Executive Officer

Well basically Brett… this is Tommy again as we said earlier. We have actually gone through 300 construction loans, a complete deal of our California value portfolio, and that we ordered appraisals for those loans that we did, that may be we saw some weakness. So we have gone through the majority of our construction loan portfolio. And John also mentioned, that he personally looked at all the CRE loans, larger sized CRE loan personally, which we do not believe that there is any deterioration based on the Feds service cut rate. CRE, we have to remember, CRE loans is not just the loan-to-value. The key for CRE lending is debt service coverage on the cash flow. So if you look at all those bigger loans, we believe that there is no deterioration in this particular portfolio.

Then on the C&I loans, you know, it's a matter of the collateral, the business model, and on the multifamily loan portfolio, it's very stable, very clean. We do not anticipate any major losses and also the ones that for us [ph] also are doing extremely well. So we might do some review on some of the projects on an ongoing basis to monitor our portfolio, which we have been doing in the past anyway. But I think that's an ongoing process, but the majority of the work has already completed.

Brett Rabatin - FTN Financial Securities Corp.

Okay. That's very good color. Thank you, Tommy.

Thomas S. Wu - Chairman, President and Chief Executive Officer

Thank you.

Operator

Our next question comes from the line of James Abbott with FBR. Please go ahead.

Thomas S. Wu - Chairman, President and Chief Executive Officer

Hi James. Good morning. James?

James Abbott - Friedman, Billings, Ramsey

Can you hear me? I'm sorry.

Thomas S. Wu - Chairman, President and Chief Executive Officer

James?

James Abbott - Friedman, Billings, Ramsey

Hello Tommy. Can you hear me?

Thomas S. Wu - Chairman, President and Chief Executive Officer

Yeah. I can hear you. Good morning.

James Abbott - Friedman, Billings, Ramsey

Okay. I am sorry for that. I had the phone on mute. Can you go over for me the net charge-off assumption that you have for the balance of the year in your base case scenario?

John M. Kerr - Senior Vice President and Chief Credit Officer

The charge-offs. I mean, you've seen the guidance on reserves. The charge-offs, we believe at this point that the charge-offs for the remainder of the year will be between $15 million and $25 million for the remainder of the year. The timing is uncertain and that events can happen. For example, we may not even be an agent on the project and they decided to sell the project. We will take those charge-offs, as we believe the collection becomes improbable.

James Abbott - Friedman, Billings, Ramsey

How much of those charge-offs are construction related?

John M. Kerr - Senior Vice President and Chief Credit Officer

The vast majority are construction related.

James Abbott - Friedman, Billings, Ramsey

Okay. So at this point you are not assuming any real significant deterioration at all of additional commercial business loans?

John M. Kerr - Senior Vice President and Chief Credit Officer

So far it's been business as usual in the rest of our portfolios and I should add and that might give you some comfort, that when you see the growth of our greater China portfolio, the vast majority of our C&I loans in those markets are secured by real estate or cash.

James Abbott - Friedman, Billings, Ramsey

Okay. And I'm still little a bit unclear on how much of the… we might as well call it the toxic areas and that's not probably the term that you've used. You've used distressed, but I will call it toxic. But of the non-toxic areas such as LA County, how much of the construction loans in LA, Orange County, San Diego, San Francisco Bay Area, has been reappraised within the last three months? Let's put it that way.

John M. Kerr - Senior Vice President and Chief Credit Officer

A minority within the last three months, except where we've identified certain mini pockets within some of those areas that's having been distressed, for example in the El Cajon area, in the San Diego area, in the Long Beach area. One of the things that has happened however is, while the condo markets have been very weak in those areas, the apartment markets are very strong. So that some of these projects are being converted into rental apartments, which provides a floor to the distressed value of the projects. We have not seen any deterioration in the cap rates on apartments.

James Abbott - Friedman, Billings, Ramsey

Okay. All right. I'll circle back for more questions later. Thank you.

Thomas S. Wu - Chairman, President and Chief Executive Officer

Thank you, James.

Operator

Our next question comes from the line of Erika Penala with Merrill Lynch. Please go ahead.

Erika Penala - Merrill Lynch

Hi Tommy.

Thomas S. Wu - Chairman, President and Chief Executive Officer

Hi Erika. Good morning.

Erika Penala - Merrill Lynch

Good morning. I was just wondering with the second phase of the Mingsheng investment, I know in the original press release when the merger came out, that the second phase will be executed either through the issuance of primary shares at a premium or Mingsheng purchasing shares in the open market. Have you worked out the details yet of the second stage?

Thomas S. Wu - Chairman, President and Chief Executive Officer

Well, yes. Actually I was in Beijing last Friday and I met with Mingsheng people. I think their preference is to have us issue new shares to them, because that is much more cleaner, easier for them to get the foreign exchange registration, easier process for them. That will be something that both sides are considering right now.

Erika Penala - Merrill Lynch

Okay. And my follow-up question to that is, are you looking to raise more capital aside from this second investment from Mingsheng?

Thomas S. Wu - Chairman, President and Chief Executive Officer

At this moment we do not have any plans.

Erika Penala - Merrill Lynch

I'll circle back. Thank you.

Thomas S. Wu - Chairman, President and Chief Executive Officer

Thank you, Erika.

Operator

Our next question comes from the line of Fred Cannon with KBW. Please go ahead.

Thomas S. Wu - Chairman, President and Chief Executive Officer

Hey Fred, good morning.

Frederick Cannon - Keefe, Bruyette and Woods

Hi. Good morning Tommy. Just really, a follow-up to the last question. The amount of capital you get from China Mingsheng would appear to be driving up kind of your share price. 5% of your market cap today is in the low $30 million range. I was wondering when you projected the capital levels you expect to achieve, what kind of level of capital you are using in terms of coming in from China Mingsheng with the second phase?

Thomas S. Wu - Chairman, President and Chief Executive Officer

Between $45 million to $50 million.

Frederick Cannon - Keefe, Bruyette and Woods

45 to 50. Okay. And then Tommy just a general question, obviously things have deteriorated significantly now compared to when you were talking about the year, three months or so ago. Could you kind of lay out in your own mind what would be the risk to UCBH from your current guidance in terms of what might have to happen for things to deteriorate further from the kind of levels of expectation that you are currently projecting?

Thomas S. Wu - Chairman, President and Chief Executive Officer

We believe, this is a conservative guidance given. We basically look at kind of today's market condition with some assumptions, that if the market deteriorate a little bit, I think the guidance will hold through, no problem. And I think $30 million to $35 million of allowance is a lot of money. We expect the allowance recognition will be normalized in the second half of 2008, and we also have taken out a gain on sale assumption for any loan sales in the remainder of the year. I think this is a pretty good estimate at this point in time, given what we know today and the anticipated economy for the remainder of the year.

Frederick Cannon - Keefe, Bruyette and Woods

Would it be fair to say if construction issues spread into the areas that you are considering non-distressed at this point in time, there could be some further downside risk to the credit expenses?

Thomas S. Wu - Chairman, President and Chief Executive Officer

That's the reason why we are trying to be conservative on our allowance recognition for the remainder of the year. So there is some cushion over there.

Frederick Cannon - Keefe, Bruyette and Woods

Okay. Thanks Tommy.

Thomas S. Wu - Chairman, President and Chief Executive Officer

Thank you.

Operator

Our next question comes from the line of Lana Chan with BMO. Please go ahead at this time.

Thomas S. Wu - Chairman, President and Chief Executive Officer

Hey Lana. Good morning.

Lana Chan - BMO Capital Markets

Hi good morning. John, can you talk about the reserve to non-performing loan ratio? It came down pretty dramatically and I know the regulators were in there this quarter. Do they look at that number at all, what are they saying about that?

John M. Kerr - Senior Vice President and Chief Credit Officer

Well, I'm sure the regulators are all on the line and they of course look at all these ratios. The key ratio that the regulators tend to look at, I believe, they correct me on the size later, but they always are concerned with the ratio of classified loans to Tier 1 capital. Because our Tier 1 capital is in pretty good shape with the Mingsheng injection. And so while it's obviously deteriorated, we are still obviously considered okay or you would have known about it by now.

The ratio of NPA is a funny one, because you can't look at… for example a C&I portfolio, the same as you look at a construction portfolio or you look at a CRE portfolio in terms of what those ratios mean. If you have high ratios in C&I portfolio, then your experience is going to be very large in normal circumstances, because your collateral is less solid. In the case of construction industry, although you hear about all the problems, our actual losses as a percentage of our loans, should be very small compared to what you would take on a C&I loan. Although those ratios have deteriorated, I think NPAs are the biggest problem really with getting through this type of problem, because the NPAs tend to build and it takes a while to move things out and make these loans liquid, which is why we have a very good SAG [ph] unit. But the loss experience will not be proportional to what it would have been in a less well secured segment of the portfolio.

Lana Chan - BMO Capital Markets

And could you tell us what happened with the classified assets from period end to period end from year end?

John M. Kerr - Senior Vice President and Chief Credit Officer

We don't normally disclose those, but of course they were up substantially.

Lana Chan - BMO Capital Markets

And I guess my last question is could you also share with us how much your construction portfolio is participations, where you are not the primary agent on the credit?

John M. Kerr - Senior Vice President and Chief Credit Officer

That's a good question. The tendency… our average construction loan isn't huge and the larger ones tended to be ones where we were a participant. And what I can tell you is that among the problem loans are the ones that are… participations are in the area of 60% to 70% of those problems.

Lana Chan - BMO Capital Markets

Okay. And how about on the commercial real estate side?

John M. Kerr - Senior Vice President and Chief Credit Officer

Commercial real estate, we very seldom participate.

Lana Chan - BMO Capital Markets

Okay. Thanks John.

John M. Kerr - Senior Vice President and Chief Credit Officer

Thank you, Lana.

Operator

Our next question comes from the line of Aaron Deer with Sandler O'Neill. Please go ahead at this time.

Thomas S. Wu - Chairman, President and Chief Executive Officer

Aaron, Good morning.

Aaron Deer - Sandler O'Neill

Hi, good morning guys. A couple of questions I guess. First of all, can you give us a sense of what kind of resources you are having to commit to the review and workout process in terms of people and time and where you expect that to go?

Douglas Mitchell - Senior Vice President, Corporate Development and Investor Relations

We've been quite fortunate and that we were able to source additional people for the side process from other parts of the organization who had good SAG background. Some from our internal audit group. What we did is we moved people in and then replaced them with people from somewhere else who could fill in for them. And so we were able to go from a few people to seven to eight people working full time on this.

Also, we, during the process, identified those account officers in the construction group who were very in-depth at SAG matters and those who weren't, and SAG is not something that all people are good at. But what we tried to do and having been through a few cycles and done this before and had the misfortune to work out a lot of loans 20 years ago, I realize that you have to treat SAG as an overlay of your normal workforce and take full advantage of the… of your account officers to do, for example, do the administrative work so you can spread your SAG people out.

Also we've identified those people in our construction group, who are very talented in SAG matters and they can carry the ball a little bit more on their particular loans. On top of that, we have several senior executives, including myself, John Cindery and EB Shabudin who have experience in workouts and we are heavily involved in the larger exposures. So we've been able to use a multiplier effect.

What we really want is for our key SAG people to be involved in the negotiating, in the legal matters, and so on where they can bring their expertise to bear. So they may show up for a few key meetings and negotiate the relationship with the developer and then turn it over to somebody who can carry out the administrative part of the task.

Aaron Deer - Sandler O'Neill

That's helpful. Thank you. And then, just kind of a technical accounting question I guess. With the shares trading where they are, is there a sense that there is going to be a goodwill write down coming?

Craig S. On - Senior Vice President and Corporate Controller

This is Craig On. With our shares, with our stock price dropping, as of the beginning of March of this year, we have been watching this situation very closely. Actually in the month of March, under the accounting rules, because of the market capitalization falling below our equity levels, this constituted a triggering event and what we have done in connection with the first quarter close, is to work with a valuation firm to look at our goodwill. We've looked at it. It's a little bit more complex this time, because we've got… if you look at our 10-K, we follow basically our segment reporting. So we have a goodwill that's' housed in domestic banking, which is what we've used to accumulate our previous domestic acquisitions and then we have the goodwill that came about, as a result of the BDB acquisition sitting and others. So, it was a little bit more complex. To cut to the chase, we have reviewed the assumptions that have been used and are comfortable that we have no goodwill impairment. Some other qualitative points which we brought to the valuation folks attention was number one, the fact that the Mingsheng deal, step one came through. That is an arm's length exchange. And then as Tommy has mentioned, having the CBRC closing up the application process to us from just a qualitative standpoint, adds a lot of value to that goodwill, sitting and other. Just FYI, is that we do our annual goodwill impairment review under our policies in September, and at least this exercise constitutes a good runway, if you will, for us to move along to that annual impairment evaluation later this year.

Aaron Deer - Sandler O'Neill

Okay. And just to clarify. So it sounds like there would be no impairment on the BDB component. But maybe I didn't hear correctly. What was with the domestic?

Craig S. On - Senior Vice President and Corporate Controller

No impairment on either domestic or the other component.

Aaron Deer - Sandler O'Neill

Okay. All right. Thank you.

Thomas S. Wu - Chairman, President and Chief Executive Officer

Thank you, Aaron.

Operator

Our next question comes from the line of Joe Morford with RBC Capital Markets. Please go ahead.

Thomas S. Wu - Chairman, President and Chief Executive Officer

Hi Joe. Good morning.

Joe Morford - RBC Capital Markets

Good morning everyone. Most of my questions have been answered. But I guess, if I missed this maybe on the slides, but can you just give us the end of period balances for loans and deposits for UCB China and talk about what growth you saw in the quarter?

Thomas S. Wu - Chairman, President and Chief Executive Officer

I don't have the number with me Joe. I think we can give you a number off line.

Joe Morford - RBC Capital Markets

Okay. And did…

Thomas S. Wu - Chairman, President and Chief Executive Officer

I think John has.

John M. Kerr - Senior Vice President and Chief Credit Officer

Hey Joe. It was very rapid growth. We had strong growth in both markets.

Thomas S. Wu - Chairman, President and Chief Executive Officer

On deposit, as well as on the loan portfolio as well.

Joe Morford - RBC Capital Markets

Okay. And any update on credit quality at BDB?

Thomas S. Wu - Chairman, President and Chief Executive Officer

Very strong.

John M. Kerr - Senior Vice President and Chief Credit Officer

Very strong. We have one loan that shows up there where, that's [inaudible] the bid, where we've already received the money for the repayment. But it's in Renminbi and we are just waiting for safe control to move it over to dollars [inaudible].

Joe Morford - RBC Capital Markets

Okay. Thanks so much.

Thomas S. Wu - Chairman, President and Chief Executive Officer

Thank you, Joe.

Operator

[Operator Instructions]. And our next question is a follow-up question from the line of James Abbott with FBR. Please go ahead.

Thomas S. Wu - Chairman, President and Chief Executive Officer

Hey James.

James Abbott - Friedman, Billings, Ramsey

Hay. Just to follow-up on my earlier question. Approximately $800 million, is that about right, of construction loans that are outside the distressed areas, and not all of those have been reappraised recently. But those markets, the home values are down anywhere from 15% to 20% depending on which type you use. Talk to us about how much of that is going to have to… how much of those loans are living on life support, if you will, because the interest reserves, they are keeping the problems [ph] alive. But because sales rates are slow, because pricing is down, you are going to have to really consider thinking about realizing a loss there. Can you give a sense there?

John M. Kerr - Senior Vice President and Chief Credit Officer

If you have a 15% reduction in the value of a home, it doesn't mean we are taking any loss at all, we did lend 85%. You are quite right though, that there has been some softening in prices. We did not stretch, in any case, on the LTVs on these loans. Some of the, I think for all the banks involved for example, in the LA area, San Francisco area, will be motivating the buyers to… or motivating the project developers to reduce their prices and get these things sold. There is a tendency to try and hold on and try to maintain their equity or larger equity in the project. Well, they are spending a lot of attention now in identifying these and talking with the developers early and saying, look fellas, you have got to move these things.

As far as losses are concerned, we would have to take a pretty substantial reduction in the price of the property before we take a loss. We also are working hard with these developers to show them that if they want to stay in the business and do more, they need to do that.

A lot of our projects in Southern California are relatively small projects around the central LA area. We are talking about places like Venice and Glendale and so forth. The developers have family money often. They are often Armenian families or Iranian families or Chinese families. Very often what they'll do, rather than sell at less than they'd like, they turnaround and buy the units themselves. And we see a fair amount of that and I would expect to see it going forward. But the challenge will be to get people to price these to sell and not wait too long as the interest reserves run out. So that's a high priority for us.

Thomas S. Wu - Chairman, President and Chief Executive Officer

And also James, bear in mind as you know, almost 100% of our construction loans are small projects, number one. Number two, all these loans actually are personally guaranteed by the sponsors, and we don't just look at the project itself. John Kerr mentioned the loan-to-value that has always been the case in underwriting all these loans. But also, we look at the secondary source of repayment, when we underwrite those loans. So when you have a personal guarantee or a smaller sized loan, the net worth of the borrower or the sponsor actually underlines. You have a very different outcome in the banking environment. So that's why we completed the review. We feel comfortable at this point. Things could change if the markets suddenly get in a deep tide, but I think at this point as I said earlier, as we look at our portfolio, we believe the risk is manageable.

James Abbott - Friedman, Billings, Ramsey

And a quick follow-up on the loans that are in the distressed areas that have been reappraised. That's about 300 million, is that about right?

John M. Kerr - Senior Vice President and Chief Credit Officer

Well, there's $320 million total. Most of them have been reappraised. A lot of them came through agent banks.

James Abbott - Friedman, Billings, Ramsey

And John, what is the new loan-to-value on those? In other words, the original loan-to-value was probably something near 60%, because I think that's where you typically tended to do the deal. Now that you've reappraised them, what is the new value of that $320 million portfolio in the LTV?

John M. Kerr - Senior Vice President and Chief Credit Officer

Yeah, obviously it's $35 million less than what it was in terms of… we took the reserves based largely on appraisals. The appraisals are coming in, I might have mentioned earlier, very different amounts depending on the characteristics of individual projects. The ones that are hurt most are for example, if you have a townhouse project with an inland empire somewhere with a land component, maybe it was phased, we are going to do so many townhouses and so many more then so many more. And you have an infrastructure investment upfront, and then at the end of the day, they are competing with single family homes after they finish the phase. That would be the most extreme, where right in this market somebody would say well, you can't build the rest of the townhouses for what you are going to get to from the sale price. So the land takes a deep discount.

Unfortunately, we recognized that possibility quite a while ago and as a result we only have one or two projects, one of them which we took a charge-off on in the first quarter. At the other extreme, you have a project which is in an area that still has good absorption, people are still buying, and the numbers are coming in much better. So, on the sample that I looked at, I calculated that our average had been something like 22% over a fairly large number of loans, where they were troubled. This doesn't mean they are awkward. Don't forget, we do have projects that are not troubled. Not every project has extreme problems, and a number of sponsors, borrowers and guarantors have recapitalized their projects. CalPERS for example, recapitalized the projects they invested in, in Central California.

James Abbott - Friedman, Billings, Ramsey

So, maybe another way of asking kind of what I am trying to get at is, what is the dollar amount of loans that are… have a loan-to-value higher than 90% or some high number, are not yet on non-performing status and have not yet received a high provision associated with those loans?

John M. Kerr - Senior Vice President and Chief Credit Officer

Well, if they were at those numbers, at this point, they would already be provided for.

Thomas S. Wu - Chairman, President and Chief Executive Officer

Remember then, that's high value, James.

James Abbott - Friedman, Billings, Ramsey

Well, not originally, but that's what I'm asking. How many of them are there today? But okay, so you have already provisioned for anything that's above 80% loan-to-value?

John M. Kerr - Senior Vice President and Chief Credit Officer

We have provided… we've a consistent methodology in our FAS-114. In our FAS-114 calculations, we also take into account selling expense. It costs you something to sell a property. So we look at the LTV and then we subtract the selling expense. When you look at the price of the property, we think it will sell for, take off a consistent selling expense, compare that to our loan, and the difference is the reserve.

If we don't have complete information or the information that's still coming in or there's flaws in the appraisal or something like that, we have been very aggressive in putting them on non-accrual and our non-accrual is very draconian. We take a 30% FAS-5 haircut on those deals, which we believe will cover our exposure. We are somewhat conservative in that. And things that are to come, some of them are deals where the agents haven't completed the process. We have a couple of deals where the agent wasn't satisfied with the methodology on the appraisal. Keep in mind that the appraisers in this market are under extreme pressure, and they are working 20 hours a day. And one of the things that they sometimes forget to do, when they are doing an appraisal, is look at alternative uses for example. We see examples where somebody would look at a project and they are just looking at it, as if that's what's going to be built there. And not saying, well gee, actually today's market has a higher value at something else. And where the entitlement really won't be a problem.

So it's something you really have to work through. Where we've identified the problems, we've either gone by the book, and taken the reserve or we've reserved conservatively anticipating that it will cover our losses.

James Abbott - Friedman, Billings, Ramsey

Is there a market for the sale of non-performing construction loans right now? Have you tried to sell any and have you been successful at that?

John M. Kerr - Senior Vice President and Chief Credit Officer

We have been in contact with people. What we didn't want to do… the market really spiked down in February, and we didn't want to get in that game with the bottom fisherman running all over the place. I think we are starting to see more serious buyers coming forward now, who are looking at these as long term investments and are not quite as bad as the bottom fisher men. So we are going to start working with some of them.

We also will have some properties, where an alternative developer has ideas about how to change a project and market it differently. Some of our larger customers in Southern California are geniuses at doing this sort of thing. So for example, we have one very wealthy developer down in the San Diego area, who came to us and said well this condo project isn't going to work. I'm going to enlarge the project and turn it into an apartment project, a luxury apartment project. He had good support from the city. No problem with changing the zoning and so forth, and it's just marching on.

So this will happen. Or in cases where, for example, the condo market is falling let's say in the mini markets around El Cajon. El Cajon is a place where a lot of students in San Diego state live. And also over in Long Beach, it's a mini depressed market. The apartment rental market there is very strong. So that put as floor on your… even though it's a heavy distressed market, it puts a floor on your losses.

James Abbott - Friedman, Billings, Ramsey

Okay. Thank you.

Thomas S. Wu - Chairman, President and Chief Executive Officer

Thank you James.

Operator

Thank you. Our final question is a follow-up question from the line of Erika Penala with Merrill Lynch. Please go ahead.

Thomas S. Wu - Chairman, President and Chief Executive Officer

Hi Erika.

Erika Penala - Merrill Lynch

Hi Tommy. Just curious about your recent trip to Beijing. Our intelligence from China is implying that the leading Chinese bankers right now are skittish about the US economy and that the regulators are stepping up to control on overseas acquisition. I was just wondering, based on your recent conversations with Mingsheng, what the management and the Board desire to increase the stake to 19.9% next year?

Thomas S. Wu - Chairman, President and Chief Executive Officer

Well the Mingsheng Bank, actually management and the Board, they look at this investment and UCBH is a strategic investment. They are fully committed to 9.9% with an option to go to 20% subject to US regulatory approval. They have already received approval to go up to 20% from CBIC. So, it's not an issue at their end.

Erika Penala - Merrill Lynch

So it's not a regulatory issue. And in terms of their desire to do it, that's not an issue either?

Thomas S. Wu - Chairman, President and Chief Executive Officer

Well, they are legally binded to finish the 9.9%. Actually you know, they are very gracious to invest [inaudible]. They are very long term. They look at UCBH value when they actually made that decision, they believed whatever they pay for step one is the franchise value of UCBH. They are very comfortable with that. And most importantly, with this strategic partnership, help them to expand the capability of increasing market share on their part in the mainland China. They have a very good partner now in the United States, who has fixed base in operation, serving the Chinese market. That should help them, in terms of differentiating themselves in the Mainland China market, to do business with the consumer and commercial and corporate business. And that's something that's extremely valuable to them.

Erika Penala - Merrill Lynch

Okay. Thank you for taking my call again.

Thomas S. Wu - Chairman, President and Chief Executive Officer

Thank you, Erika.

Operator

Gentlemen, at this time there are no further questions. Please continue with any closing comments that you may have.

Thomas S. Wu - Chairman, President and Chief Executive Officer

Once again, thank you very much for participating in this call. Should you have any questions, please feel free to contact anyone over. Thank you very much and have a nice weekend. Thank you. Bye-bye.

Operator

Thank you. Ladies and gentlemen, this does conclude the UCBH Holdings Incorporated first quarter 2008 earnings conference call. If you'd like to listen to a replay of today's conference call please dial 1800-405-2236 or for international participants 303-590-3000. You will need to enter the access code of 11110281 followed by the pound sign or "#" key. One again those numbers are 1800-405-2236 or for international participants, 303-590-3000 with the pass code of 11110281 followed by the pound sign or "#" key. We do thank you for your participation and you may now disconnect your lines at this tim

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Source: UCBH Holdings, Inc. Q1 2008 Earnings Call Transcript
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